SBA Opposed Five-Year Small Business Size Period

The Small Business Runway Extension Act, signed into law earlier this week, changes the small business size calculation under revenue-based NAICS codes from a three-year to five-year average.

The new law has sparked a great deal of discussion in the government contracting community, with some commentators pointing out that not all small businesses will benefit.  But how does the SBA–the agency tasked with implementing the new law–feel?

Well, according to commentary published earlier this year, the SBA thinks the five-year period is a bad idea.

On April 27, the SBA published a revised white paper explaining how it establishes, reviews and modifies small business size standards.  In Federal Register commentary accompanying the notification of publication, the SBA addressed several requests from members of the public seeking various changes to the size rules.

Among other things, SBA rejected requests that small business status be determined by profits or net worth instead of annual receipts.  The SBA also declined to switch the construction size standards from revenue-based to employee-based.

Then, the SBA addressed a request that it replace the three-year average with a five-year average:

Calculate average annual receipts based on five years.  [A commenter] recommended calculating average annual receipts over the preceding five years, instead of three.  The commenter alleged that this would allow small businesses to plan and increase capacity before entering full and open competition and provide longer transition time from small business status to other than small business status.  In addition, small businesses with large temporary increases in revenues for one or two years would not lose their small business status.

SBA’s response: SBA does not adopt this comment.  SBA believes that calculating average annual receipts over three years ameliorates fluctuations in receipts due to variations in economic conditions.  SBA maintains that three years should reasonably balance the problems of fluctuating receipts with the overall capabilities of firms that are about to exceed the size standard.  Extending the averaging period to five years would allow a business to greatly exceed the size standard for some years and still be eligible for Federal assistance, perhaps at the expense of other smaller businesses.  Such a change is more likely to benefit successful small business graduates by allowing them to prolong their small business status, thereby reducing opportunities for currently defined small businesses.

It’s a curious response, because the statute in place at the time required the SBA to use a three-year period.  The SBA could have simply said “we don’t have authority to make this change” and left it at that.  Instead, the SBA took the opportunity to weigh in on the merits of the suggestion.  Perhaps the SBA was telegraphing its position on the upcoming Runway Extension Act, which was introduced in the House a few months later.  

Maybe the SBA’s position has evolved since April–but maybe not.  Either way, the SBA is now required to implement the very change it rejected earlier this year.